Citi Exits India's HDFC, Raises Needed Capital

Under pressure from banking regulators to bolster its capital reserves, Citigroup (C) has sold its remaining stake in India's Housing Development Finance Corp. Ltd., or HDFC.

Citi sold 145.3 million shares, all of its 9.85 percent stake in HDFC, reportedly at 6.2 percent discount to HDFC's closing price on Thursday.

The total proceeds from the sale is estimated at $1.9 billion at the current exchange rate. Citi will realize a pre-tax gain of $1.1 billion or an after-tax gain of $722 million.

"We are pleased with the results of our investment in HDFC and will continue to value our long-standing relationship with the company. Citi remains deeply committed to India and we continue to focus on growth opportunities for our franchise in this very important market," said Pramit Jhaveri, CEO of Citi India.

While disposing a 1.5 percent stake in HDFC back in June, Citi had revealed it has no plans to sell any additional shares of HDFC. The deal resulted in a pre-tax profit of around $160 million. It then held the balance of 9.85 percent stake.

The stake sale is seen as an action to raise capital before new international standards take effect that is being put in place by regulators as they try to prevent a repeat of the 2008 financial crisis.

The current proposed Basel III standards place restrictions on capital that represents ownership in financial institutions above 10 percent. European and U.S. banks have been selling stakes to confirm to the new banking standards.

By reducing its stake in HDFC to below the 10 percent threshold, Citi said it was only trying to speed up ongoing capital planning efforts as it prepares for the implementation of Basel III, rather than strategic considerations.

Citi acquired a total of about 11.4 percent stake in HDFC between 2005 and 2006 and was looking at increasing its stake into a strategic investment.

However, the Indian regulators have been historically conservative in allowing foreign banks or financial institutions to expand their investment in India. Citi was unable to scale up its investment or capitalize on HDFC's substantial network.

Citi is one of the largest foreign banks in India and is integrally connected to the trade and capital flows in the region. As of December 31, 2011, Citi had about $29 billion in assets in India.

In Friday's regular trading session, C is currently trading at $32.49, down $0.22 or 0.68% on a volume of 7.83 million shares. In the past 52-week period, the stock has been trading in a range of $21.40 to $47.50.